CONVERSION OF UNREGISTERED ENTITY INTO COMPANY AS PER COMPANIES ACT, 2013

MCA vide its notification dated 5th July, 2018 has brought the Companies (Authorized to Register) Second Amendment Rules, 2018 (‘Amendment Rules’). The said Amendment Rules shall also come into force from 15th August, 2018.

The section deals with registration of unregistered entities like partnership firms, LLPs, cooperative societies and such other entities, as a company under the Act, 2013. The amendment paves way for such entities having two or more members to get them registered under the Act, 2013 either as a company limited by guarantee, company limited by shares or unlimited companies.

Conversion into a company under the Act, 2013 now possible with 2 members:

Unregistered entities like LLPs, partnership firms, societies, etc. with two or more members can with effect from 15th August, 2018 onwards opt for conversion into a company limited by liability or guarantee or with unlimited liability in accordance with the provisions of Part XXI of the Act, 2013.

WHO CAN CONVERT INTO COMPANY UNDER SECTION 366, COMPANIES ACT, 2013?

1. Any Partnership Firm,
2. LLP,
3. Cooperative Society,
4. Society,
5. Any other business entity formed under any other law for the time being in force.

EXCEPTIONS:

• A company registered under the Indian Companies Act, 1882 or under the Indian Companies Act, 1913 or the Companies Act, 1956, shall not register in pursuance of this section,
• A company having the liability of its members limited by any Act of Parliament other than this Act or by any other law for the time being in force, shall not register in pursuance of this section as an unlimited company or as a company limited by guarantee;
• A company shall be registered in pursuance of this section as a company limited by shares only if it has a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons;
• A company shall not register in pursuance of this section without the assent of a majority of such of its members as are present in person, or where proxies are allowed, by proxy, at a general meeting summoned for the purpose;
• where a company not having the liability of its members limited by any Act of Parliament or any other law for the time being in force is about to register as a limited company, the majority required to assent as aforesaid shall consist of not less than three-fourths of the members present in person, or where proxies are allowed, by proxy, at the meeting;
• where a company is about to register as a company limited by guarantee, the assent to its being so registered shall be accompanied by a resolution declaring that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, and of the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount.

MISCELLANEOUS PROVISIONS:

1. The chapter II provisions related to incorporation shall mutatis mutandis apply to section 366.
2. There shall be minimum 2 members for the purpose of registration of a company.
3. A company with less than 7 members shall register as Private company.

DOCUMENTS REQUIRED:

1. In case of an application by a Limited Liability Partnership or firm for registration as a company limited by shares/guarantee or Unlimited company:-

• A list showing the names, addresses, and occupations of all persons named therein as partners with details of shares, held by them respectively, showing separately shares allotted for consideration in cash and for consideration other than cash along-with the source of consideration and distinguishing, in cases where the shares are numbered, each share by its number, who on a day, not being more than six clear days before the day of seeking registration, were partners of the Limited Liability Partnership or firm as the case may be; (In case Registration as a company limited by shares),
• A list showing the names, addresses and occupations of all persons, who on a day, not being more than six clear days before the day of seeking registration, were partners of the Limited Liability Partnership or firm, as the case may be with proof of membership;(In case Registration as a company limited by guarantee or unlimited company),
• A list showing the particulars of persons proposed as the first directors of the company, along with Director Identification Number (DIN), passport number, if any, with expiry date, residential addresses and their interests in other firm or body corporate along with their consent to act as directors of the company;
• In case of a firm, deed of partnership, bye-laws or other instrument constituting or regulating the firm and in case the deed of partnership was revised at any time in the past, copies of the principal and all subsequent deeds including the latest deed, along with the certificate of the registration issued by the Registrar of Firms, in case the firm is registered;
• Written consent or No Objection Certificate from all the secured creditors of the applicant;
• Written consent, from the majority of members whether present in person or by proxy at a general meeting, agreeing for such registration;
• an undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899 (2 of 1899) as applicable;
• A copy of the latest income tax returns of the Limited Liability Partnership or firm, as the case may be.

NOTE: The list of members and directors and any other particulars relating to the company which are required to be delivered to the Registrar shall be duly verified by the declaration of any two or more proposed directors.

2. In case of an application by a society/Trust for registration as a company limited by guarantee under section 8-

• A list showing the names, addresses and occupations of all persons, who on a day, not being more than six clear days before the day of seeking registration, were members of the society/Trust with proof of membership;
• A list showing the particulars of persons proposed as the first directors of the company, along with DIN, passport number, if any, with expiry date, residential addresses and their interests in other firms or bodies corporate along with their consent to act as directors of the company;
• A list containing the names and addresses of the members of the governing body of the society;(no need in case of Trust)
• A certified copy of the certificate of registration of the society/Trust;
• Written consent or No Objection Certificate from all the secured creditors of the applicant;
• written consent .from the majority of members whether present in person or by proxy at a general meeting agreeing for such registration, and the resolution shall also provide for declaration of the amount of guarantee;
• An undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899 (2 of 1899) as applicable;
• A copy of the latest income tax return of the society/Trust;
• Details of the objects of the company alongwith a declaration from all the members that the restrictions and prohibitions as mentioned in clause (b) and clause (c) of sub-section (1) of section 8 of the Act shall be complied.

NOTES:

1. Where an application is made by a society or trust for registration as a company limited by guarantee and it has been proved to the satisfaction of the Registrar that the proposed company has its objects in accordance with clause (a) of subsection(1) of section 8 of the Act and it intends to comply with the restrictions and prohibitions as mentioned respectively in clause (b) and clause (c) of that sub-section, the Registrar shall issue a license in Form No. INC. 16 to allow such society or trust to be registered as a limited company without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited” and thereupon issue a certificate of incorporation in terms of sub-rule (4) of rule 4 on an application submitted under Chapter II of the Act for incorporation of a company.
2. An undertaking from all the members or partners or trustees providing that in the event of registration as a company under Part I of Chapter XXI of the Act, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for its dissolution.
3. No application for registration as a company under the Act shall be made by a trust during the pendency of any proceedings under section 92 of the Code of Civil Procedure (5 of 1908).
4. Upon registration of a society or trust as a company under the Act, no application for conversion into a company of any other kind, except conversion from a private company to a public company or vice-versa, shall be made till the expiry of a period of ten years from the date of incorporation under the Act.
5. In case a society or trust intending to register as a company under section 366 of the Act is registered under section 12A of the Income Tax Act, 1961 (43 of 1961) for claiming exemption on its income, an intimation in this regard shall be sent to the Income- tax authorities and proof of its service shall be attached with Form No. URC-1.

LEGAL ASPECTS- NOT A TRANSFER;

Registration of unregistered entities under the Act, 2013 does not tantamount to transfer at all as the same take place as operation by law and is not inter-vivos between the parties. The said arrangement is not a transfer but a mere conversion wherein old entity is transformed into a new registered company under the Act, 2013.

Further, as per section 47 (xiii) of the Income Tax Act, 1961, transfer of capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm subject to certain conditions as prescribed hereunder shall not be treated as transfer at all.